The Tufts Community Union (TCU) Treasury has revamped how it invests its capital from student activities fees this fall, placing a large portion of this year's million-dollar budget into Certificates of Deposit (CDs).
A CD is a "time deposit," an investment held for a fixed period of time from which no withdrawals can be made without giving prior written notice. Banks set an interest rate when offering a CD that remains valid throughout the time deposit.
The TCU Treasury will receive the deposit and interest at the end the CD's maturity period, which will be seven months at 2.25 percent interest, compounded monthly.
Junior and TCU Treasurer Jeff Katzin decided to invest in CDs on the recommendation of the TCU government's private accountant David Randall. Katzin and Randall compared returns from previous years' strategies with projected returns from CD's to make the decision.
"The main benefit of a CD is that there is no risk, but the main drawback is that it is less liquid. If you withdraw before the maturity period ends you pay a penalty," Assistant Professor of Economics Steven Yamarik said.
"The seven-month Certificate of Deposit offered by Citizen's Bank was the only length of time with a higher interest rate than what we currently have in the Money Market Account," Katzin said.
Katzin researched past spending to discover how much of the student activity fee goes untouched for the first seven months of the school year.
He said that the TCU typically only spends half its money by mid-March because the spending is "very back-heavy." Katzin invested the seven-month CD in late August, and it will mature in late March.
After totaling the student activities fees, the Treasury first places them in an outside account currently held with Citizen's bank. The Treasury minimizes the amount of money in the checking account and in past years placed the remainder into a money market account to earn higher interest.
The money market fund collects a fixed 1.75 percent interest, compounded, per month.
"A money market [account] is a portfolio of government bonds and other securities whose rate of return changes daily depending upon what happens to the prices of the bonds in the portfolio. Therefore, the rate of return is variable," Yamarik said.
The student activities fee brought in $1,089,000 in the 2004-2005 academic year. The Treasury accounts for that total, along with $152,000 remaining from last year's budget.
The Treasury invested only $300,000 in the CD account rather than putting in fully half of the student activities fees to compensate for variations in spending patterns.
The $300,000 would earn a total of $38,736.64 in interest when compounded over seven months in the money market account, Katzin said. Instead, according to him, the $300,000 will earn $50,561.70 in interest, leaving a net gain of $11,826.06.
"This is a wonderful gain for the Tufts Community Union financially since $50,000 goes a long way for student groups," Katzin said.
The additional money "will be added to the surplus, which exists for unexpected costs that may come our way throughout the year," Katzin said. He hopes the surplus will continue to grow and predicts that "this will be something that future Treasuries incorporate in their fiscal plans."
This year's spending pattern will most likely help decide whether more should be invested in CD's in future years.
All leftover money will continue to be invested in the money market account. "The main benefit of a money market is that it is highly liquid, you can buy or sell shares daily. In fact, there is next to no risk premium associated with a money market," Yamarik said.<
